With its two biggest victories in
nearly a year in Iraq and Syria, Islamic State has energized its
fighters, littered the streets of two cities with the bodies of its
enemies and forced Washington to re-examine its strategy.

Militant Islamist fighters take part in a military parade along the streets of northern Raqqa province June 30, 2014.

The near simultaneous capture this month
of Ramadi west of Baghdad and Palmyra northeast of Damascus has
reinforced the sway of the self-proclaimed caliphate of all Muslims
closer to the ramparts of Islam's two great historic capitals.

But although the fighters sound
triumphant on YouTube, vowing to press on to Baghdad and Damascus, there
appears to be little room for them to expand their territory much
further -- at least for now.

In both Iraq and Syria they have lost
ground in recent months as well as gained it. The weakest targets are
already in their grasp, and they will have to devote as much effort to
holding and administering the areas that they already control as to
attempting to extend their onslaught.

In Iraq, Islamic State fighters already
hold most of the land where their fellow Sunni Muslim Arabs predominate.
The Shi'ite-led government has responded to the loss of Ramadi in the
Euphrates River valley by dispatching Iran-backed Shi'ite militia, fresh
from beating Islamic State fighters in the valley of Iraq's other great
river, the Tigris.

In Syria, rival Sunni Arab insurgent
groups, once seen as feeble in comparison with Islamic State, have drawn
support from Arab countries and grown stronger, expanding their own
territory at the expense of the government of President Bashar al-Assad.

In both countries, Islamic State has also suffered defeats at the hands of Kurds.

But even if there are limits to how far
Islamic State -- also known as ISIS -- can expand its territory for now,
the victories this month give it crucial momentum, important for
maintaining the support of people in the places it rules over.

"The priority for ISIS now is to
capitalize on the momentum that is gained from taking control of Ramadi
and Palmyra because this war has been about momentum shifts," said Ahmed
Ali, senior fellow at Washington D.C.'s Education for Peace in Iraq
Center.

"Up until (when) ISIS was able to take
control of Ramadi, the momentum was against ISIS. Now this is a prime
opportunity for ISIS to keep pushing, because it's trying to regain its
reputation as this invincible force."

Limits in Iraq

In Iraq, after the army collapsed last
year and Islamic State seized much of the north of the country in a
lightning advance, the government and its allied Shi'ite militia rallied
to halt the offensive before the gates of Baghdad.

Islamic State fighters fell short of
their objective of seizing Samarra north of the capital, site of one of
the most revered Shi'ite shrines, which they had pledged to destroy.

The government and its militia allies
are now firmly in control of the majority-Shi'ite capital itself, and
have so far prevented Islamic State from securing strong footholds in
Sunni farmland on its southern and western outskirts, territory known as
the "triangle of death" during the 2003-2011 U.S. occupation.

In March, government forces and the
militia advanced north of Baghdad into the Tigris valley, recapturing
former dictator Saddam Hussein's home town Tikrit.

The Shi'ite militia, with Iranian funds,
weapons and advisors, have proven a particularly capable force on the
battlefield, although Washington is worried that their presence will
exacerbate sectarian tensions.

Until now, the government had kept the
Shi'ite militia out of the overwhelmingly Sunni Euphrates valley west of
the capital. But the fall of Ramadi has forced Baghdad to dispatch
them, meaning Islamic State will now face a more formidable foe.

Washington's fear is that the presence
of the Shi'ite militiamen will drive local tribes to embrace Islamic
State. The Pentagon described as "unhelpful" a decision by the Shi'ite
militia to give their advance a sectarian slogan as a code name.

But just as in 2006 and 2007, when the
brutality of Islamic State's al Qaeda predecessors drove many Sunni
tribesmen to make peace with hated U.S. Marines, the fighters' extreme
violence means some locals may tolerate even the feared Shi'ites.

Islamic State fighters contacted by
Reuters in Iraq say their main task for now is combating the
"awakenings" -- Sunni tribesmen who have resisted their rule.

They have killed hundreds of sheikhs and
local tribal leaders in the Euphrates valley. But that sort of violence
brings blood feuds that in the past made their rule short-lived.

Michael Knights, an Iraq expert at the
Washington Institute, said that with the capture of Ramadi, the fighters
had reached the natural boundaries of a state to rule Sunni territory.

Although they could still launch attacks
on Baghdad itself, those would more likely be isolated attacks rather
than a campaign to seize the city.

"In Iraq, ISIL is still losing ground,
not gaining it, regardless of tactical gambits like Ramadi," he said,
using another acronym for the group. "ISIL is only capable of tinkering
at the peripheries of the areas it already holds."

Opportunities in Syria

Syria, where Assad's government has been
on the back foot in recent months, offers greater potential
opportunities for Islamic State to advance further. Unlike in Iraq,
Sunni Muslims are the majority across the country, so a group seeking to
rule over Sunnis faces fewer natural limits to its expansion.

While Washington supports the Iraqi
government and has used its air power to fight Islamic State in Iraq in
conjunction with Baghdad, in Syria it remains opposed to Assad and has
no strong allies on the ground.

"On the Syria side, it's a completely
different dynamic because ISIS there does not have a formidable force in
front of it," said Ali. "It's able to attack Syrian government forces
and we have seen so far that the Syrian government forces have been
retreating in front of ISIS attacks. So Syria might actually be more of
an objective ... than Iraq."

Nevertheless, unlike in Iraq, Islamic
State in Syria is only one of a number of Sunni Muslim insurgent groups,
which run the gamut from hardcore jihadists like the al Qaeda-linked
Nusra Front to comparatively secular nationalists.

When Islamic State was surging into Iraq
last year and bringing advanced weaponry seized there back into Syria,
it seemed like many of those other Sunni groups would fade into
irrelevance.

But in recent months, Sunni groups that
have resisted joining Islamic State have been receiving more weapons and
funds from U.S.-allied Arab states and possibly Turkey.

They have become more potent, inflicting
defeats on Assad's troops and allies in the heavily populated southwest
and northwest, and have remained more united than in the past.

Islamic State has also made gains, and
tries to recruit other jihadists to join it. But many Syrians resent its
foreign fighters and its Iraqi caliph, Abu Bakr al-Baghdadi. Commanders
of other groups know that the only way to keep the Arab guns and money
flowing is to resist any alliance.

But the victory in Palmyra, known as
Tadmur in Arabic, helps Islamic State make the case that it is still the
most effective Sunni fighting force in Syria, which in the battle for
loyalties is more important than the strategic value of any one target.

"We are working on bringing in more
fighters. That is why seizing Tadmur was very important, it is
significant," said an Islamic State fighter reached by telephone, who
declined to be named as he was not authorized to talk to the media.

"New fighters are now joining. Syrian
fighters. They have discovered that the State is true and fulfils its
promises and brings back your dignity."